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Tax Exclusion for Combat Service

If you are an eligible member who served in a combat zone, the IRS can exclude your income from taxation. Publication 3, The Armed Forces Tax Guide, the authoritative source for all military specific tax matters, covers the Combat Zone Exclusion. Read below for a summary of the policy.

Requirements

1. You must be an eligible member.

2. You must be serving or have served in a designated combat zone during the tax year(s) in which you receive the exclusion.

Actions

There is no required action for you to receive the exclusion. Each military organization will automatically certify your entitlement by excluding reportable income on your W-2. If you believe you are entitled, and your W-2 reflects your full, unadjusted annual pay and benefits, contact your military pay office to issue a corrected W-2.

Provisions

  • Excludable Income – You can exclude the following income:
    • Basic Pay – All for every month you are present in a combat zone.
    • Reenlistment Bonuses – You can exclude this income if the reenlistment occurred while present in a combat zone.
    • School Loan Repayments – You can exclude part of the repayment associate with the months you were present in a combat zone. For example, if a year is required to earn the repayment and you serve six of those months in a combat zone, you can exclude half of the repayment income.
    • Imminent Danger/Hostile Fire Pay – You can exclude all of this income.
    • Discharge Benefits – You can exclude income from selling accrued leave earned while in a combat zone.
    • Awards and other Financial Incentives – You can exclude associated income for submissions made while in a combat zone.

 

  • Non-Excludable Taxes – Military pay for earned while in a combat zone is subject to Social Security and Medicare taxes and will appear on your W-2.

 

  • Period Covered – You will receive the exclusion for months you served in a combat zone, including partial months of service. One or more days served in a combat zone during any month counts as a full month.

 

  • Limits – The following limits are placed on your exclusion:
    • Enlisted Members – You can exclude all military pay for each month present in a combat zone.
    • Warrant Officers – You can exclude all military pay for each month present in a combat zone.
    • Commissioned Warrant Officers – You can exclude all military pay for each month present in a combat zone.
    • Commissioned Officers – You are limited to the highest rate of enlisted pay plus imminent danger/hostile fire pay for each month present in a combat zone.

 

  • Married Personnel – The following exclusion combinations are authorized:
    • Both are Military and Served in a Combat Zone – Both may receive the tax exclusion for the months they were present in a combat zone.
    • Both are Military and One Served in a Combat Zone – The spouse who served in a combat zone may receive the tax exclusion for the months they were present in the combat zone.
    • One is Military and Served in a Combat Zone – The spouse who served in a combat zone may receive the tax exclusion for the months they were present in the combat zone.

 

  • Hospitalization – You can exclude military pay earned during hospitalization (in or out of a combat zone) due to wounds, disease, or injury incurred in a combat zone. Military pay received for hospitalization that extends beyond two years from the last month of presence in a combat zone is not excluded.
Page Last Reviewed or Updated: 21-Dec-2016